Next economic crash is around the corner

American statists are convinced that the modern-day United States is immune from an economic catastrophe arising from its welfare-state, regulated-economy way of life. They say that out-of-control federal spending and debt is nothing to be concerned about. There is no need to slash welfare-state spending or warfare-state spending, they assert because America is an exceptional country, one that isn’t subject to the natural laws of economics, like other countries are.

“Not Relative”

Some of the statist university professors still maintain that the federal government’s $20 trillion debt load (and growing) is nothing to worry about because “we owe it to ourselves,” a manifestly ludicrous point that might cause bondholders and taxpayers to raise their eyebrows.

Statists hold that the deep economic crises in places like Venezuela, Greece, and Puerto Rico bear no relevance to the United States. Some of them even argue that all that federal spending, debt, and regulation are beneficial and bring economic prosperity to a nation. Indeed, some of the statist university professors still maintain that the federal government’s $20 trillion debt load (and growing) is nothing to worry about because “we owe it to ourselves,” a manifestly ludicrous point that might cause bondholders and taxpayers to raise their eyebrows.

But make no mistake about it: the crash is coming and it’s going to be big. There is no way that a government can continue incurring massive amounts of debt and escape the adverse consequences of such folly. The issue isn’t if it’s coming but rather when.

The “Big crash theory”

In crises, whether they are foreign-policy oriented (e.g., 9/11) or economically oriented (e.g., the 1929 stock market crash), People panic and start running around like chickens with their heads cut off, unable to think in calm, rational ways.

When the big crash does come, rational thinking is going to be in short supply. That’s what always happens in crises, whether they are foreign-policy oriented (e.g., 9/11) or economically oriented (e.g., the 1929 stock market crash). People panic and start running around like chickens with their heads cut off, unable to think in calm, rational ways. And the tendency is to look to the government to solve the problem, notwithstanding the fact that government has caused the problem. Sort of like chickens looking to the fox to take care of them in times of crisis.

Let me tell you what statists are going to say when the big crash comes. They are going to say: “Another failure of America’s free-enterprise system.” And then they are going to be calling for more socialism, interventionism, economic control, and taxes to save America’s “free-enterprise system.”

Making people believe they can fly

The indoctrination is so complete that by the time that children reach adulthood, they have no doubts whatsoever that the United States is “free-enterprise.”

This is where the indoctrination that students receive in the state’s educational system is so critically important to statists. From the first grade, children are indoctrinated with the notion that the United States is a “free-enterprise” country, unlike, say, Cuba, North Korea, and Venezuela, which are socialist countries.

Thus, when the welfare-state, warfare-state governmental apparatuses crash, it’s logical that the indoctrinated person is going to conclude that it’s all because of the failure of free enterprise and then support (more) socialism, interventionism, regulation, and taxation.

History lesson

The classic example of this phenomenon was the stock market crash of 1929, which led to the Great Depression. By this time, public (i.e., government) schooling systems had been operational for about two generations. Thus, most everyone believed that the Federal Reserve System, which had been adopted in 1913, was part of a “free-enterprise system.”

America not only got Social Security, a program that had originated among socialists in Germany, but also the permanent conversion of the entire federal government to what is called a welfare state.

When the Federal Reserve’s monetary central planning caused the 1929 stock market crash, most everyone bought into the notion that it was “free enterprise” that had failed and, consequently, supported more socialism and interventionism as the solution. That’s when America not only got Social Security, a program that had originated among socialists in Germany, but also the permanent conversion of the entire federal government to what is called a welfare state.

The political genius of President Franklin Roosevelt was in convincing Americans in the 1930s that the welfare state wasn’t socialism at all but instead simply a freedom device to save America’s “free-enterprise system.” He knew that most Americans at that time were opposed to socialism. So he figured that if he didn’t call the welfare state socialism but instead “saving free enterprise,” he could get away with the conversion.

And he was right. Today, most Americans would say that the America’s welfare state and government-controlled economy constitute “freedom” and “free enterprise,” notwithstanding the fact that such programs as Social Security, Medicare, Medicaid, Obamacare, subsidies, public schooling, drug laws, and income taxation are core elements in Cuba, North Korea, and Venezuela.

What?, Where?, When? and how?

In what sector of the economy will the crash be most predominant? I don’t know, but one good bet is the banking industry rather than the housing market or the stock market.

In a truly free market, banks would be treated no differently than any other business. You invest in the wrong company in the stock market, you lose your money. You put your money in a bank that goes under, you lose your money.

Whenever a bank goes under, the bank is absorbed by another bank and no depositor loses his money.

But that’s not what has happened in the banking sector. For well over a century, government officials have been protecting people from their mistake in picking the wrong bank. Whenever a bank goes under, the bank is absorbed by another bank and no depositor loses his money. That type of policy will inevitably result in a weakened and shaky sector over time.

That is manifested by FDIC insurance. Notice how they continue to raise the amount of their “insurance.” That’s to encourage people to keep their money in the banks. The higher the “insurance,” the safer people feel.

What if there is an industry-wide collapse in banking? What then? How do they pay everyone off if there isn’t enough “insurance” to cover everyone, which there isn’t? To reimburse John for his $50,000 in the bank, do they first tax John $50,000 and then give the money back to him?

If a few banks go under, no problem. They have enough money to pay off depositors. But what if there is an industry-wide collapse in banking? What then? How do they pay everyone off if there isn’t enough “insurance” to cover everyone, which there isn’t? To reimburse John for his $50,000 in the bank, do they first tax John $50,000 and then give the money back to him? Or do they confiscate people’s 401ks and replace them with bonds, like the Argentine government did several years ago. Do they re-confiscate gold and then sell it off to get the money to pay off everyone? Do they crank up the printing presses for another bout of inflation?

Regardless, there is one important thing everyone should be aware of now: When the big crash comes, it will not be because “free enterprise” and “free markets” will have failed. It will be because of the welfare-state, warfare-state way of life, and the out-of-control spending and debt needed to fund it has failed. Genuine free enterprise will be the solution to the crises, not the cause of the crisis.

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. This article was first published in The Future of Freedom Foundation and is republished here with permission. The views expressed in this article are the author’s own and do not necessarily reflect Global Village Space’s editorial policy.

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